Diseconomies of Scale
Definition: Diseconomies of Scale
Diseconomies of scale occurs when Average Costs start to rise with increased output. Therefore there will be decreasing returns to scale
· Diseconomies of scale can occur for the following reasons:
1. Poor communication in a large firm
2. Alienation: Working in a highly specialized assembly line can be very boring, if workers become de motivated. In a large firm there is an increased gap between top and bottom e.g. call centres
3. Lack of control: when there is a large number of workers it is easier to escape with not working very hard because it is more difficult for managers to notice shirking.
Firms may attempt to overcome diseconomies of scale by splitting up the firm into more manageable sections.
Minimum Efficient Scale,
This is the minimum point of output necessary to achieve the lowest A.C. on the LRAC.
This has implications for the optimal number of firms in the industry
If the MES was 10,000 cars a week and the total industry demand was 40,000. This would mean that the optimal number of firm would be 4, if there were more firms in the industry then average costs would be significantly higher.
In a natural monopoly the optimal number of firms is one, therefore the MES would be equal to the total industry demand. E.g. Water or Electricity networks
The Size of the minimum efficient scale will be determined by factors such as
i) Degree of fixed costs
ii) Scope for specialisation
iii)
Essay Questions - Economies of Scale
a) What Factors Give rise to Economies of Scale
b) How does the MES affect the optimal number of firms in an industry?
Essays and Revision Notes on Costs, Revenue and Profit
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